David Hargreaves says while the move to ring-fence' investors' losses on rental properties for tax purposes appears logical we must be cautious about assuming that all the consequences will be good ones

David Hargreaves says while the move to ring-fence' investors' losses on rental properties for tax purposes appears logical we must be cautious about assuming that all the consequences will be good ones

By David Hargreaves

If something seems like a good idea, it should always be tried.

We shouldn't, however, prejudge and just assume because something seems a good idea it will prove to be so when applied. Human nature when combined with the rule of unintended consequences can often contrive to produce unexpected results from things that seemed as if they would be a sure fire winner.

Therefore, I would counsel some caution on the Government's moves to 'ring-fence' rental losses on investment properties for tax purposes.

This is a logical move and I thoroughly agree with it in principle. But I also think it shouldn't be rushed and there will need to be some vigilance shown that there aren't those unintended consequences.

Just as a general observation; while applauding this Government for wanting to 'get on' with things, I think there does need to be a balancing act between urgency and haste. I do fear that some of the measures being implemented are tipping toward the latter.

In reading the IRD's issues paper on the proposed new moves I had the feeling, rightly or wrongly, that the paper looked a bit rushed - and that maybe not all wrinkles in the proposed policy had been ironed out. Now I guess that's what an ideas paper is for, to test ideas and have them refined, but to my mind it's preferable to have something put down on paper first that looks clear and definitive. And I'm not sure everything in that paper does.

For me possibly the most interesting thing in the paper is the section that talks about the decision to apply the ring-fencing on a "portfolio basis", which means that investors would be able to offset rental losses from one property against rental income from other properties – calculating their overall profit or loss across their portfolio.

Because I think this is a fairly vital part of the new proposals, I include the IRD's discussion of its decision here in full:

Portfolio basis
4.1 It is suggested that the loss ring-fencing rules should apply on a portfolio basis. That would mean that investors would be able to offset losses from one rental property against rental income from other properties – calculating their overall profit or loss across their portfolio.
4.2 The alternative – a property by property basis – would mean that each property would need to be looked at separately, with losses on one not able to be offset against income from another.
4.3 A property by property approach would be stricter than a portfolio approach, achieving the highest level of ring-fencing. However, it would add complexity, as losses would need to be tracked separately for each property. Moreover, a property by property approach may just result in taxpayers with portfolios re-balancing their debt funding to avoid having loss-making properties (or at least minimising the extent to which any particular property is loss-making). That response to the rules applying on a property by property basis would be inefficient, and may mean that this approach may have no real advantage over a portfolio approach – adding considerable complexity and increasing compliance costs for no real gain.
4.4 Also, a property by property approach may be seen as unfair in that if a taxpayer has two properties and breaks even on the portfolio overall, the taxpayer’s tax position would depend on whether they break even on both properties or make a gain on one and a loss on the other.
4.5 We therefore suggest that the ring-fencing rules apply on a portfolio basis, so a person with multiple properties would calculate their overall profit or loss across their whole residential portfolio.

I'm not actually convinced by all the reasoning there. 

I mean, yes, avoiding complexity is good where possible, but some of the logic here seems forced and maybe shows a government department that was in a hurry to come up with something. I'm not even really sure what the point being made in 4.4 is. Why is the scenario outlined unfair as such?

I hone in on the 'portfolio basis' section because I think this is the section most likely to trigger a human behavioural response - or at least be the centre piece of the behavioural response to these tax changes.

Bearing in mind every tax change always brings a human response. And it's from this that we most need to worry about those pesky unintended consequences.

In trying to think through how people might react to these changes, it strikes me that the reaction to the 'portfolio basis' approach might be that investors feel encouraged to buy more properties. 

If you can't any longer offset rental losses on the one investment property you own against other income you make in other activities, then wouldn't there be some logic in buying more property - so that any rental losses can be offset? The temptation might be to reduce the income you get from other sources in favour of buying more property and therefore rental income and losses can be offset.

At the very least I can see this new approach leading to a bigger concentration of large, even corporate landlords. 

Maybe mums and dads with their one investment property might see it all as too much of a hassle and exit the scene. But the large landlords (possibly those large enough to have substantial investment income outside of property) may well see it as in their interest to double down on investment properties - and possibly exit their other lines of business on which they will no longer be able to balance profits against any rental losses.

I can certainly see this as one consequence of this move.

The next thing is, should we necessarily be worried? And I'm honestly not sure.

I've had extensive experience of renting. During that time I have rented both from 'mum and dad' owners and from, if you will, corporate-type landlords.

Generally I have to say that I found dealing with professional landlords to be a more consistent and generally more satisfying experience than dealing with mum and dad owners. Obviously the professionals knew better what to expect, what each parties' rights were, and also they tended to have the people power to get jobs done.

The mums and dads I encountered (though not all of them) often tended to view owning a property as a bit of a sinecure - a bit of jam tomorrow, some easy pocket money. It meant they could get quite miffed at having to fork out money for the property or to get things done. 

So, would it necessarily be bad that such people - who possibly went into investment property ownership with unrealistic expectations - do now exit the property scene? 

Well, obviously, if a lot of them try to do it all at once - in bearing in mind these new rules might be applied as early at April 1 next year - then that might not be great for the housing market, particularly in Auckland, in the short term.

Then there's the possibility of what happens if we do see more consolidation of property ownership in few hands - 'super landlords'. Is there a potential for monopoly behaviour with increased rents?

Of course, on the latter point, rentals can only really be put up if the market will pay the higher ones. And if the Government does get some traction on reducing housing shortages then that shouldn't happen.

I suppose the point is that there are potential problems here and the reaction of people and the marketplace will have to be watched closely.

This shouldn't be rushed. If more time is needed to get an approach in place that everybody is happy with, then give it more time.

I don't think everything needs to be done tomorrow. Just the very fact that you are tackling issues and seen to be doing so is often sufficient to get the kind of reaction you are looking for.

What the Government wants is more people in houses at reasonable prices.

What the Government doesn't need is a housing market that in some way gets tripped up as a consequence of its actions. And with the market particularly in Auckland pretty quiet, that is possible. 

Don't make this 'good idea' become bad.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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What I suspect you are not making clear is the "rental loss" of one can be offset against any "rental profits" within a portfolio - paupers reading this will auto-think of capital profits not rental profits

The social defect is the lone trier with one property is disadvantaged against the big-guy with a portfolio of properties - who then become a privileged species - and yes, it will encourage the lone-trier to load-up the truck

Thanks for your comment. I have just clarified that a little now to make clear we are not talking about capital profits. Regards

This article didn't really make a lot of sense to me and I think the prospect of organisations hoovering up rental stock is overstated.

Residential property is of little interest to institutional investors as it's simply too fiddly. New builds are a different story but the idea that consortiums are going to go around buying up houses everywhere, I don't believe.

It will be smaller investors who exit the market, while LVRs tap out existing large investors as capital gains slow. Ultimately this means cheaper stock available for first home buyers. The top end won't be affected and will still be defined by economic conditions and the international market.

Why won’t there be rental portfolio consolidation ?
As interest rates rise the market will consolidate as many small undercapitalized investors are forced to sell
It isn’t merely first home buyers who will necessarily be the buyers
Therefore there will undoubtedly be some consolidation in ownership of rental property

IF interest rates rise

"the possibility of what happens if we do see more consolidation of property ownership in few hands - 'super landlords'. Is there a potential for monopoly behaviour with increased rents?"

That's exactly what I predicted in the other initial thread. It's already very common in some farming types: the rise of corporate ownership, management and operation.

There are two issues that I see in this scenario:

  1. It's adding more middle management into rental property. Someone's gonna pay the C-class execs, the accounting, the admin. And that would be split between the original owners, who, as shareholders in the company, might trade a smaller return for better certainty, and the renters, who now have a well-resourced corporate and a much-altered power balance to contend with.
  2. Instead of the thousands of mom-and-pop outfits, all competing against each other , many fewer corporates are gonna be tempted to act as a cartel. And ComCom is notoriously toothless or cojone-less if their lack of trust-busting in the building materials cartel duopoly is anything to go by. Good luck holding coordinated (but plausibly deniable) rent rises to any reasonable percentages.

Consequences. Who woulda thunk?

Who are these investors ready to stump up large amounts of capital to enter an industry where both the government and reserve bank are hell bent on suppressing returns?

The same reasons that property is less attractive now as an investment apply regardless of size.

Who said anything aboot capital? A plausible model could run like this, between Property Aggregator Company PAC, their accountant TA, and Mom and Pop - M&P, proud owner of a drafty shack incurring losses and a pitiful ROI:

PAC: Here's the deal. You transfer that there Shack to us, at your original purchase price. That implies zero CG, so no IRD involvement whatsoever. In return, we will issue you an equivalent dollar-amount shareholding in PAC.

TA: That's Debit assets, Credit Share Capital, right? No cash?

PAC: Spot on, TA. We'll then Revalue your asset to current market, and issue you with shares to the value of that increment. Again, no cash.

TA: That's Debit assets, Credit Share Capital, again.

M&P: so we just swap one style of asset for another - right? We own a chunk of PAC then?

PAC: Spot on. Neat, eh. Now, here's the money shot. We will pay you a return on those shares. It will be around bank interest rates or a little higher, Yoiu'll be taxed on that, but here's the thing. It's a positive return, not a loss. We get to worry about how to deliver it. You just bank it.

M&P: You mean we don't have to worry about vacancy, partay-inclined tenants, meth tests, maintenance, damage, WOF's, insulation, and all the rest we have to put up with now?

PAC: Yup, that's the beauty of it. All that's our worry.

M&P: But what if everything goes tits-up (excuse my French). What are we left with?

PAC: Your shareholding is backed by Property, which can be sold, and the capital returned to shareholders, pro-rata their holdings. If there is tax, that's a first call on PAC, not you. You might not get the full value back. Present performance is no guarantee of future results. But you will get something, and without any worry about chasing it.

M&P: But, we could just sell up ourselves and keep it all. That's safer, surely.

PAC: Ah, Mom and Pop, you seem to have forgotten two things. Firstly, by keeping the shack, you are exposed to exactly the woes you just just listed. Secondly, because you've offset losses against your other income and because you've sold the Shack for way more than you've bought it for, IRD is gonna come along and put you through the wringer. Think, accountant, and possibly legal fees to get Their tax assessment reduced. Plus the stress at (I can't help noticing) an advanced period of your lives. Do you really wanna handle all That?

M&P (glance at each other and nod): Hell, no., Where do we sign?

PAC (sotto voce) They all see it Our way after That little spiel...

PAC: (out Loud) Welcome to PAC, new valued shareholders. Long may our association continue! Waiter, the Bolly, please.

PAC: (sotto voce) The Bolly's a deductible PAC Entertainment expense, natcherally....

You really need a disclosure that this is not financial advice.

There is various IRD legislation that might cover a bunch of this already. Seems like a risky shareholding to have anyway - shareholders are always last to get funds.

Deprivation of income by selling at original cost could have some tax consequence too.

Also, if it was a pitiful ROI before, why would it not be now just because it's aggregated? This relies on all those with profitable properties also selling into the PAC, so that it was net positive. Not sure what their case to do so would be.

Also, who is going to lend to the PAC? As a commercial entity, it will likely attract risk premiums.. especially if the properties were concentrated.

I do get what you're saying, but not sure on the reality of the situation.

Sounds like a tax avoidance scheme to me. Good luck with those penalties

It's a Thought Experiment, chaps and chapesses. It exists only as tortured electrons on page sends. You will look in vain for the Property Aggregator Company on the Companies website.

You are also free to invent your own Thought Experiments.

But of This you can be sure.

Across the nation, there will be lawyers, tax accountants, and other types who know the law backwards, who can move much faster than Gubmints or tax authorities, and who will have a long list of clients for whom Actual Action is desirable. These types will be quietly pondering schemes, configurations, and courses of Action to sell to these clients. The exact form will depend on the exact legislation finally promulgated, the timing and the risk assessment.

Because human nature.

You said it was a plausible model. Differs from a thought experiment.

It just seems you're freaking out over all these possible ways it could go wrong... because of your human nature.

Me no freaking. As seasoned common taters know, I have no skin in the property game, but an Interest in the effects of dopey policy.

The point about such Thought Experiments is that others, With skin in the game, will be contemplating responses to the eventual form of the legislation. And all such activitiy is economic deadweight: it is the economic equivalent of paying to dig holes, paying others to fill 'em in, with zero net welfare increment. Non-tradeables.

As such, if the policy effect is to increase such deadweight, it is stupid policy from the Good Intentions Paving Company (2017) Ltd..

That's why the gist of David's article is - careful - your mileage may vary.

Avoidance is legal. Evasion ain't. Rookie definitional error.

What a load of Rubbish.
If landlords are negatively geared and can’t afford to keep the properties then they won’t be buying anymore unless they are cashflow positive.
The Banks will be watching who,they are lending to,and if negatively geared they won’t be getting anymore money.
Of course it will be against the full portfolio as all the properties form the business and not separately.
You do your tax return on the whole property portfolio not on individual properties so the thought that it could be individual is ridiculous.
Does a business do a tax return on the cost for each employee separately?????
Of course there are going to be consequences of every policy that this new COL introduces but introducing new taxes and poking their dirty noses into landlords business is just not right.
This COL is going to be absolute toast at the next election.

Hell must have frozen over! for once I agree with you!

I guess if they’ve got it wrong they can always change the laws at a later date. Everyone knows what the goal of the law is, if you then try to work around that goal, don’t complain if your little work around gets squashed

leave the property investors alone (they have not left them alone, hence current shortage) and stop the taxpayer from becoming overnight developers (with the built in risk) might be the solution.


How many times do we have to say that Property Investors do not have any tax advantages over other business’s.
All this meddling from this COL is going to seriously backfire on this country, they are totally out of their depth


You are wrong, won’t affect us but others who just want to provide for their retirement with one or two properties will be hammered!

Those who just want to provide for their retirement with one or two properties will obviously be in it for the long term – and will probably / hopefully be reasonably conservative in funding etc.

So not a quick flick, and negative gearing not a principle driver.

I think “hammered” might be a bit much.

How many times do you need to stop thinking its all about you. This is about specuvestors not professionals. There are significant differences. I agree professional with solid structure/yield etc will sail on. Specuvestors with the sole objective of capital gain and tax off set will have to shorten sail.

The so-called specuvestors must be in Auckland then!
Why on earth should the whole country be penalised due to the Auckland situation!
With the meddling from this COL into investors business, it will come to bite them on the rear as the consequences will be not what the country needs!

What is COL?

I think he means Coalition :) Either that or he's got KFC on the brain.....

Coalition of Losers!

Yup, as above, they are hitting you where it hurts.......

How dare those losers keep to their election promises! No Government ever does this. What's the world coming to!!!!!

We are all hurting but if that means we can make house prices more affordable then it is well worth the effort.

Double-GZ, Not one of the new policies will affect us, it is the fact that they will hurt people who,are just trying to provide themselves and family a better lifestyle!
This COL have no idea!

TM2, Either your Accountant told you these changes won't effect you or Crunchy the Clown did.

You comment; "they will hurt people who,are just trying to provide themselves and family a better lifestyle!"

Previously you commented that this is exactly why you are a Landlord and to also provide for your kids. You've also mentioned that you would not be lining up for GRI at 65 as your rolling in it. I didn't believe any of it then and I sure don't believe any of it now!

RP! It was Crunchy The Clown That told me!
The Brightline Test to 5 years is no problem as we don’t sell!
Ring fencing no problem as all of our properties are positively geared so no difference.
All of our properties comply already with the insulation requirements as all properties well maintained.
So you know our investment position so what is the new policy that is going to affect us??????
RP! Like I care whether you believe anything I say or not!
Take me up on the challenge that I have previously offered Gordon, or are you Gordon?

TM2, ha-ha :-) nope, I'm still not Gordon and neither is he me.

Is Landlording a primary or supplementary source of income for you?

Why on earth would you ask that?
Landlording is our business so you can say that it is our major source of income and we are extremely good at it!

TM2, you didn't answer the question......

Again, is Landlording your primary or supplementary source of income?

RP, what part of major source of income don’t you understand??
major, primary whatever you want to take it!
Why do you ask?

“Coalition of Losers” you state.

However, these “losers” had sufficient wherewithal to negotiate and successfully install themselves as government of the day – something I imagine National would have dearly loved and perhaps desperately wished upon themselves.

“politics is defined as the exercise of power” – in this case National lost, or perhaps “failed” if you want to be brutal about it.

However, 3 years will pass quickly – fortune may favour you next time, so please don’t despair in the interim.

Oh for goodness sake averageman ............ speculators are the symptom , not the cause of the housing problem .

The cause is the out- of -control immigration , and then the cost of new builds pulling up the price of used houses .

If no tax advantages, then it won't affect you and other darklords right - so no need to worry, correct?

But yet, there seems to be a very emotional response to any changes for something that you say doesn't exist. This is a little confusing?


..but they have a tax advantage over other home owners. This is the big problem. Not to mention rent paid by the state from our taxes which is kinda is like a tax advantage eh? Not to mention buying for cap gain but being untruthful about that. Get it now?

The Government needs to clarify what problem it is trying to solve here. If it’s to correct the perceived or otherwise unfairness of utilising property losses to avoid tax on a principal income, then they will need to extend this to look through companies as well. Or is it to address house prices and supply? Either way, the one or two property owner with a full time job as their main income will be the loser here, not professional landlords. Aka the average guy in the street trying to get ahead. The portfolio / non portfolio thing is a bit irrelevant in my view and the debate should be on the merits or otherwise of the main income / property loss part of this.

I don’t know if you could characterise it as a “problem” – but it could be suggested that current offset rules are simply encouraging and enabling pricing and behavioural distortions in the market place - amplified within those areas of the country facing serious supply and demand imbalances.

However, what role the government should ultimately play in this and whether property should be a special case will probably find various interests forever at odds.

Correct , we know there is a problem ............. houses are way too expensive , and unaffordable .

What this COL is missing is what the causes of the problem are .

They are blaming landlords , speculators , foreign investors , greedy developers , letting agents , and anyone else they can think of .

The actually have only themselves to blame , for the following reasons :-

Immigration is out of control , and we dont have houses for the huddled masses arriving from China and India .

The Resource consent Act and other impediments ensure we cannot build houses quickly or cheaply .

The horrific costs of building which are increasing apace , are having the effect of making existing housing stock increasingly expensive .

So now that want to virtually ban landlords from entering the market

Who is going to provide houses to rent ?

The Government through Housing New Zealand ..........with a social housing shortage of over 5000 houses?

God help us

Well said. Stop adding fuel to the population fire. Wasn’t that COL policy? I’d also like to see a study of building cost inputs so we can understand exactly how the COL intends to make houses cheaper. I have had quotes for three different renovation projects and each has come back extraordinarily expensive. Not a good start to make anything affordable.

....we dont have houses for the huddled masses arriving from China and India.

I think "huddled masses" is possibly an incorrect mental image. What appears to be happening is a type of displacement. People who were not born here may find themselves in possession of higher value property than the average Kiwi, certainly higher than the bottom 50% of folk. This would be a natural consequence of immigration policy - the encouraging of capable and ambitious immigrants.

So what is happening is that locals, especially young locals, are finding themselves priced out of certain markets as the popular locations are fought over by the new arrivals and by new I mean anyone who has arrived in the last thirty years. As more people arrive popular locations expand with the original good locations increasing astronomically in value.

Existing institutions are utilized for maximum effect which is entirely natural. Many immigrants buy up extra housing stock and become landlords. It would be interesting to profile the landlords of Auckland to determine how extensive this is.

I would say immigrant wealth is increasing at a greater rate than local-born wealth and that this will have interesting ramifications for the future of our society. You only have to look around the old elite neighborhoods to see the remarkable demographic changes taking place.

Sorry if this comes across as a sort of Right Wing rant but I am merely describing what is happening and what should have been entirely predictable under the circumstances.

Smart locals have only one choice and that is to play the same game. Become landlords, send your children to private schools, pay for extra tutoring, help the kids buy houses, take advantage of everything possible if they wish to keep on par with the new New Zealanders. There is no turning back and a lot of people are on board with this. From the GreaterAuckland website:

Auckland is also increasingly different from the rest of New Zealand. We are younger, more diverse, more educated and more productive. We are also growing much faster and will continue to do so. There is no going back to the Auckland of old.

Auckland is undoubtedly a far more vibrant, exciting and better city than it was 30 years ago. We need to make sure that this progress continues and accelerates.

Resistance would appear to be futile.

"Smart locals have only one choice and that is to play the same game" What, like don't ring cash on the till, enslave hopeful immigrants from your own country in your business, deal in drugs. Yep, we;ve come a long way, alright.

PocketAces, without doubt this is a thorny problem.
We have also traded our laid back attitude and the right to heartily critique and mock a wide range of things, something we were pretty good at. Some things have got better while other things have got decidedly worse, mostly those things that made us distinctly Kiwi.

Pretty much correct. When I left home in the early ‘80s, I had no financial resources. Had I stayed in NZ I’d have likely ended up in a middle decile suburb in Wellington e.g. city end of Karori. It’s unlikely I could have afforded Auckland as i found it too expensive in the late ‘80s. Becoming an expat enhanced my finances and opened my eyes. NZ houses were actually cheap compared to places I was living and some Asians had money and were very hard working, enhanced by a strong sense of family. Taxinda is not going to save those who live in a fantasy world that the ‘invaders’ will be sent away and they will be competitive again. Compete or move to olde world enclaves like Havelock North.

@Ex Expat, by all means while we live in 1071 and 1050 respectively, I still think Havelock North is an excellent place to live and bring up a family. There are a lot of people who can only dream about moving there, some of them my work colleagues...

Looking on TradeMe, Havelock North seems quite pricey.

Yeah very pricey. Personally I like the style of this one but it would be well over $2mil. I might as well stay put in Remmers. https://www.trademe.co.nz/property/residential-property-for-sale/auction...

Double-GZ, did you see this in recent news:

Monumental price fetched at auction for small inner-city Wellington cottage

This ticks the boxes being discussed the other day. Nicely renovated, many bedrooms and good location = rich rewards

OMG it's such a lovely home with a pleasant outlook towards the Wellington Botanic Garden. A similar property with similar outlook in DGZ would probably fetch $2M though.

It is a lovely wee place. I looked at a room in a flat there in about 1993, when it was full of students.

Oh my, in 1993 I was a student myself lol. Don't think I could have afforded the rent on a cottage like this though...in my time, it was much economical to live in a student apartment within walking distance to the Uni.

DGZ knock yourself out drooling over these. That Havelock North house for sale is part of the stable of properties owned by Black Barn retreats in the Tuki Tuki Valley. Check the cost per night to stay in these stunning houses, https://www.blackbarn.com/retreats. Easter Treat!

Poplars 7 looks familiar.

Good grief. I could move to Havelock North today. My street is dead because the neighbours have taken off to their holiday homes, but I’ve spent over an hour fighting manic Auckland traffic around Sylvia Park.

“Resistance would appear to be futile.”

Do be wary of Nationalism – a la Europe.

David, I really disagree with the opinion that we should take more time to make sure the policy is perfect before applying it (or to do anything really). I applaud the new government for getting things done, promptly, if the policy is not perfect you can always amend it later.

I have a share in a company which owns commercial property . Its a look through entity . I along with my fellow shareholders carried losses for the first few years until the property became cash positive.

I wonder how this tax would affect this investment , which is genuine long-term commercially driven investment .

How is this any different to me carrying losses on any other business venture ?

Those who cry the loudest have the most to hide!

This needs to be implemented slowly

There is a risk that in the short term with an ongoing shortage of housing in Auckland, all it will do is drive up rental prices with reduced rental supply. House prices will fall with increased supply but probably not quickly enough - i.e. increased stock for sale at a higher prices sitting on the market for extended periods.

It would be far better to address the high immigration rate first so that demand and supply are more balanced and then make the taxation changes.